Gyroscopic Investing

Hi all,

i have finished Craig Rowland book, and i have some doubts about long term bonds (25 to 30 years). The book covers lots of details about PP, but lack a little bit about how to approach real bonds implementations. Hope somebody could help with some advises.

Lets imagine a scenario where you are using PP not only to invest past savings, but to invest your monthly or year future savings also.

When you start PP (year 1), normally you invest a "big" amount of money (comparing to the future incorporations) on the 4 different assets. Lets say 10K$ per asset. And specifically, 10K$ on 30 year long term bonds.

At the second year (beggining of year 2), you want to invest another 1K$ on long bonds (what you could saved during the year). You have two options:

a. Sell the previous 10K$ long term bonds (now are 29 years old) and buying 11K$ on new one. Every year the interest rates are lower than your bonds, it will trigger capital gain taxes. Theorically, you will obtain the best PP bond returns, since you are holding always the oldest ones.

b. Buying 1K$ on a new long term bond (30 years), so now i have two bonds of different ages. 10K$ on 29 age bonds, and 1K$ on 30 age bonds. At the third year i will have 3, and so on. Capital gain taxes will be trigger once i start selling the first year bonds.

So at this point, every year i will have this issue. What do you advise me to do? This is not a clear point in the book. Obviously, with ETFs for the 4 assets, reinvesting funds or gold, is much simpler and passive. Even you don't have to rebalance, since you can just buy the lagging asset. But bonds (short and long) will trigger capital gain and dividens taxes every year.

it looks tricky, so any advice from experts will be wellcome.

regards!

I just buy new bonds every month or two, so I have a bunch of bonds with slightly different durations and interest rates. All of this takes place in a tax-protected account, so thankfully I don't have to worry about capital gains and dividend taxes.

In a taxable account it would probably be best to buy different bonds each time you add to your account because it will make your record keeping easier. You will know that each different type of bond you purchased has one single cost basis. Also, whenever you need to buy LTT I would simply buy ones that are closest to 30 years and then if it comes time to sell LTT try to sell the lower duration ones first.

I don't think it is too much work, but if it is keeping you up at night a LTT fund is okay from my view.

melveyr wrote: In a taxable account it would probably be best to buy different bonds each time you add to your account because it will make your record keeping easier. You will know that each different type of bond you purchased has one single cost basis. Also, whenever you need to buy LTT I would simply buy ones that are closest to 30 years and then if it comes time to sell LTT try to sell the lower duration ones first.

I don't think it is too much work, but if it is keeping you up at night a LTT fund is okay from my view.

I suppose this is why people buy LTT funds so they don't have to worry about this stuff. But even most LTT funds (such as TLT) has a 20+ average maturity I believe so they will be a bunch of different maturity bonds in it. No need to worry about constantly having 30 year bonds. Just keeping your overall LTT bond maturity somewhere between 20-30 years.

Pointedstick wrote: I just buy new bonds every month or two, so I have a bunch of bonds with slightly different durations and interest rates. All of this takes place in a tax-protected account, so thankfully I don't have to worry about capital gains and dividend taxes.

Hi Pointedstick,

the issue here where i live (Europe), is that we don't have taxable accounts, so everytime i have to sell bonds (short for cash, and long), i have to declare capital gains and dividends in both. And it should happen every year.

The only ETF similar to TLT is EXX6.DE, that tracks iboxx germany 10+ index. It only has 50% of bonds that are more than 22 years old. Is the only option here to track a long bond index with the maximum default security (Germany).

So as i am seeing, my options are not very easy to achieve.

I don't think you need to sell your bonds every year. Harry Browne recommended selling your 30-year bonds after 10 years, not one. If you're constantly buying new 30-year bonds and selling your old ones once they're a decade old, I think you'll be fine. It's not crucially important that the duration of all your bonds is always 30 years. Some countries don't even have access to 30-year bonds! It's okay to be a bit flexible.

Pointedstick wrote: I don't think you need to sell your bonds every year. Harry Browne recommended selling your 30-year bonds after 10 years, not one. If you're constantly buying new 30-year bonds and selling your old ones once they're a decade old, I think you'll be fine. It's not crucially important that the duration of all your bonds is always 30 years. Some countries don't even have access to 30-year bonds! It's okay to be a bit flexible.

but once you start buying new bonds every month or year (lets say for this example, every year), the day you will have to sell the first bond will come. And after it, the others. I mean, when the first bond reaches the age of 20 years old, it will have to be sold. But after it, next year, the next will come (the one that was the previous year 21 years old), and so on. We are at the same situation, isn't it?

Refering to maintain bonds of 30 years, its because there are some studies that agree that following this system, you obtain better returns and CAGR.

Arturo wrote: i have finished Craig Rowland book...

Well, I don't know what that book said, but it seems to me that if you are contributing new money you should consider following Harry Browne's advice and place it in cash until cash hits 35% and then rebalance the whole portfolio.

As Harry Browne wrote, you would only need to sell you long term bonds when one or more of them reached 20 years to maturity.  If you are buying 30 year bonds this should be an infrequent occurrence.

Overall, I don't see that your problem is all that serious. 

Put new PP money into cash ---> rebalance the portfolio when cash (or any other asset hits 35% or 15%) ---> sell bonds when they reach 20 years to maturity and buy a new batch of 30 year bonds.

If anything, it seems like what you are really asking is a rebalancing question, and I heard somewhere that the book covered the topic of rebalancing from a variety of angles and perspectives.

While I think that the new PP book was intended to update and expand upon Harry Browne's earlier work, if the new book leaves you with questions and you haven't read Harry Browne's books, I would definitely do that next.

MediumTex wrote:

Arturo wrote: i have finished Craig Rowland book...

Overall, I don't see that your problem is all that serious. 

Put new PP money into cash ---> rebalance the portfolio when cash (or any other asset hits 35% or 15%) ---> sell bonds when they reach 20 years to maturity and buy a new batch of 30 year bonds.

Hi mediumTex,

Thank you very much for your time and advises.

Lets imagine that i put money on 1 year short term german bonds (T-Bills). Every year i sell the bond, i can put new money. The issue here is that you can not put new money on the 4 assets at the same time, so you can not take the advantage of extra returns on all of them.Maybe the asset that is growing is gold, and not cash.

Arturo wrote: b. Buying 1K$ on a new long term bond (30 years), so now i have two bonds of different ages. 10K$ on 29 age bonds, and 1K$ on 30 age bonds. At the third year i will have 3, and so on. Capital gain taxes will be trigger once i start selling the first year bonds.

You don't have to sell the bonds unless:

1) They are less than 20 years maturity

- Or -

2) You hit a rebalancing band.

So at the end of the year if you look and find the long term bonds are 34% of your portfolio, and your rebalancing band is 35%, then you probably shouldn't buy any more. You have to use your judgement here.

Or you could just store up more cash as MediumTex suggested if this is a problem for you.

But more likely what will happen is you'll just buy another bond at $1000 and add it to your ladder. Older bonds will eventually start to cycle out. But this will take many years.

craigr wrote:

Arturo wrote: b. Buying 1K$ on a new long term bond (30 years), so now i have two bonds of different ages. 10K$ on 29 age bonds, and 1K$ on 30 age bonds. At the third year i will have 3, and so on. Capital gain taxes will be trigger once i start selling the first year bonds.

You don't have to sell the bonds unless:

1) They are less than 20 years maturity

- Or -

2) You hit a rebalancing band.

So at the end of the year if you look and find the long term bonds are 34% of your portfolio, and your rebalancing band is 35%, then you probably shouldn't buy any more. You have to use your judgement here.

Or you could just store up more cash as MediumTex suggested if this is a problem for you.

But more likely what will happen is you'll just buy another bond at $1000 and add it to your ladder. Older bonds will eventually start to cycle out. But this will take many years.

i did a small math for iShares eb.rexx® Government Germany 10.5+ (DE) (EXX6) and the results are:

- 60% of the bonds are more than 20 years of maturity (50% more than 22)
- 40% of the bonds are between 15 and 19 years of maturity

under your opinion, do you think that this product could perform properly in the long run, and above all, when the PP portfolio need long bonds?

That sounds sufficient. You don't need to be super dogmatic about all the bonds being exactly 30 years in duration; some places don't even have 'em! I believe Australia tops out at 15 years. Just get close enough and you'll do fine.

is there any reason why not to buy german bond 2044?  i never quite understand why people favor funds or etf s.  mind bogling, no offence.

Pointedstick wrote: That sounds sufficient. You don't need to be super dogmatic about all the bonds being exactly 30 years in duration; some places don't even have 'em! I believe Australia tops out at 15 years. Just get close enough and you'll do fine.

Hi Pointedstick,

thank you very much for your advise. Once EU-PP gives less return than US-PP, i just wanted to be sure that i am going to obtain the maximum return possible :-).

CA PP wrote: is there any reason why not to buy german bond 2044?  i never quite understand why people favor funds or etf s.  mind bogling, no offence.

Hi CA PP,

thanks for your opinion. The only reason for selecting ETFs in stead of direct real bonds is because ETFs are much simpler to use from the point of view of a novice investor. Is more simple if you want to reinvest the small bonds dividens (compounding return), if you want to add small monthly savings (buying every month 100$ in 2044 bonds?), or you just want to accumulate capital investing on the lagging asset.

i don't know. is like i am having a brain paralysis right now :-)

Arturo,

what about mixing various ETFs?

Rebalancing with just one.

As I know direct German Bonds won't be allowed after 1 Jan 2013!